Edited version of your private ruling

Authorisation Number: 1012611747569

Ruling

Subject: Lump sum payment from a foreign pension scheme

Question

1. Is any part of the lump sum benefit paid from a pension scheme in an overseas country assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Are you entitled to the lump sum payments in arrears tax offset?

Answer

1. Yes.

2. Yes.

This ruling applies for the following periods:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You became a resident of Australia several years ago.

You were employed by an overseas employer several years ago. During this time you were a member of a foreign superannuation fund as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997.

You receive a pension from the Pension Fund that is administered by a company (the company).

Your pension commenced during the 20YY income year.

An e-mail from the company advised that you will receive a pension in arrears payment, a lump sum and a first monthly payment.

You received for a pension in arrears payment and for a lump sum payment on dd/mm/yyyy.

The End of Year Certificate for the 20XX Income Tax Year from the overseas country advised that there was taxable earnings and income tax deducted.

An e-mail from the company during the 20ZZ income year provided a calculation of the lump sum and advised you were also entitled to a tax free lump sum.

An e-mail from the company during the 20YY income year advised the amounts of the pension and lump sum when you left employment.

We have accepted as correct the amounts of pension you have included in your assessable income.

You have made no contributions into the Pension Fund since becoming a resident of Australia.

There have been no transfers into the Pension Fund from other foreign pension schemes by you since becoming a resident of Australia.

Funds cannot be accessed from the Pension Fund other than at retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-95(2)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection 305-70(1)

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 305-75(2)

Income Tax Assessment Act 1997 Subsection 305-75(3)

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1936 Section 159ZRA

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the lump sum payment from the overseas pension scheme (the Pension Fund) is calculated as an amount.

Consequently, an amount of the lump sum payment from the Pension Fund must be included in your assessable income in the 2012-13 income year. As you have already included an amount in your assessable income we will reduce this amount to the correct amount.

From the total pension payments that you included in your return, you are entitled to a lump sum payment in arrears offset of an amount in the 20YY income year. This is in addition to the foreign tax credit you have already been allowed.

You should request an amendment to your income tax return for the 20YY income year to reduce your assessable income and to receive a pension in arrears rebate. You should also attach a copy of this letter to your request for amendment

Issue 1

Summary

The 'applicable fund earnings' in respect of the lump sum payment paid from the Pension Fund is calculated as an amount.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application.

Applicable fund earnings

You became a resident of Australia for tax purposes several years ago and received a lump sum payment in respect of the Pension Fund during the 20YY income year. As this was more than six months after you became an Australian resident, in respect of each payment, section 305-70 applies to include the 'applicable fund earnings' in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

(a) work out the total of the following amounts:

(i) The amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

(ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

(iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period;

(b) subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

In short, you are assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions you made since you became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

(a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

(b) then, calculate the other amounts.

All exchange rates are published on the ATO's website.

Amounts to be used in calculation

The benefit in the Pension Fund on the day before you became a resident of Australia was an amount. This is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Pension Fund since you migrated to Australia. There have been no transfers into the Pension Funds from other foreign pension schemes by you since becoming a resident of Australia.

During the 20YY income year, your benefits in the Pension Fund was paid out to you in the form of a one-off lump sum. Therefore this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. You have stated that during the 20YY income year the lump sum payment was converted to an amount in Australian dollars.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. You were a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the lump sum.

Applying subsection 305-75(3) of the ITAA 1997 to you circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund is as follows:

305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from the Pension Fund

In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c).

To this figure we add the amounts determined under paragraph 305-75(3)(d).

An amount of the lump sum payment from the Pension Fund will be included as assessable 'applicable fund earnings' in your tax return for the 20YY income year.

Issue 2

Lump sum in arrears tax offset

Summary

From the total pension payments that you included in your return, you are entitled to a lump sum payment in arrears offset in the 20YY income year. This is in addition to the foreign tax credit you have already been allowed.

Assessable in the year of receipt

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wage income is generally considered to be 'derived' when it is received.  Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings, discusses the Commissioner's view on when income received by a taxpayer will be assessable. Taxation Ruling TR 98/1 provides that salary and wages or other employment remuneration is assessable on a receipts basis, which is to say it is assessable when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997.

In your case you received your lump sum payment in the 20YY income year. It is acknowledged that the lump sum was paid for pension payment in arrears over a number of income years. However, consistent with the Commissioner's views expressed in TR 98/1 the lump sum is assessable in the year of receipt which was the 20YY income year.

Accordingly, you are required to include the entire lump sum payment as assessable income in your 20YY income tax return under subsection 6-5(4) of the ITAA 1997.

Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

To be eligible for the tax offset, the amount of the eligible lump sum must not be less than 10% of the taxable income of the year of receipt after deducting the amount of the eligible lump sum that accrued in earlier years and other income.

In your case, as the lump sum payment that you have is greater than 10% of your taxable income, you are eligible for the tax offset under section 159ZRA of the ITAA 1936 as part of your lump sum payment was for the pension payment in arrears which accrued in earlier income years.

Conclusion

The total assessable foreign source income has been reduced (not including cents) to reduce the amount of applicable fund earnings from an amount (that you previously included) to the correct figure as calculated above.

A pension in arrears offset has been allowed.

You should request an amendment to your income tax return for the 20YY income year to reduce your assessable income by an amount and to receive a pension in arrears rebate. You should also attach a copy of this letter to your request for amendment